Two years ago, Tommy McClung and Erik Landerholm spent a dreary winter knocking on doors around Portland in search of funding for their startup, an online auto shopping site called CarWoo.

"It was tough," McClung said, "and I think there was a pretty negative atmosphere."

Both were Oregon State grads, and both had wives and kids in Oregon. But when a Silicon Valley tech incubator called Y Combinator offered them early-stage funding in California, they didn't hesitate to move south.

Y Combinator tossed them in with other promising entrepreneurs and well-connected mentors, and the pair lived and slept in a tiny office while putting together their business and nurturing their ideas.

Operations: The seed fund will make relatively small "seed loans" of $25,000 to $50,000 to several promising startups at a time. The fund's managers and associates will mentor startups, and companies that show the most progress will have access to further loans or investments. The fund will also work to connect successful startups with large venture capitalists.

Managers: Bridge City Ventures, run by business consultant Angela Jackson and venture capitalist Jim Huston.

Kickoff: The seed fund will start taking applications Tuesday at portlandseedfund.com (managers have dropped plans to charge an application fee.) The seed fund's launch party is Tuesday evening in the Pearl District, but it's already booked to capacity.

The move paid off almost immediately, rejuvenating the pair and opening doors to the investment they couldn't find in Portland.

"I literally had conversations with angel investors that took 10 minutes and I got $40,000 checks," recalled McClung, now 32.

CarWoo remains in the Bay Area, now with 30 employees and $6.7 million in venture backing. But McClung and Landerholm will be back in Portland next week, flying back with on their own dime to celebrate a new effort to improve conditions for Oregon's entrepreneurs.

That initiative -- the Portland Seed Fund -- kicks off with a launch celebration Tuesday even. It will deploy $2 million, mostly public funds, in hopes of keeping future entrepreneurs like McClung and Landerholm at home.

"We lost that company because we didn't have $25,000 to $50,000 to keep them here," lamented Angela Jackson, one of two partners with Bridge City Ventures, hired by the Portland Development Commission to manage the new fund.

CarWoo and another Silicon Valley startup with Oregon roots, Cloudkick, will speak at the seed fund's launch Tuesday evening, sharing their perspectives on what the state needs and what it takes to achieve startup success.

Oregon entrepreneurs have long complained that there isn't enough venture capital in the state to help small companies grow big.

More recently, though, the focus has shifted to mentoring young entrepreneurs and providing them relatively small sums to develop their ideas at the earliest stage, before they even have a product.

Within Portland's established investment community, there's a great deal of skepticism that small sums can raise the temperature within the entrepreneurial climate. But CarWoo's McClung said even a modest sum could have kept them here.

"It starts with that seed capital," McClung said. "That's the fundamental reason why Portland was so difficult for us."

The Portland Seed Fund hopes to do more than just fund these entrepreneurs. Like Y Combinator, it hopes to mentor them and direct them to bigger investments for future growth.

That's an essential element of what makes Y Combinator successful, according to Alex Polvi, 25, another OSU alum who prospered after starting a Silicon Valley company.

His business, Cloudkick, launched in January of 2009 to help manage networks on Internet-based "cloud" computers. It joined Y Combinator a few months later and had its first venture capital round shortly after that.

Then last December, cloud computing titan Rackspace Hosting bought Cloudkick for an undisclosed sum, retaining Polvi and his team to help Rackspace's customers manage their networks.

Y Combinator serves as a kind of prestigious university, Polvi said, providing an education and an influential Silicon Valley network.

"I don't think it's as simple as just putting a bunch of startups in a room," he said.

But while it's not easy to replicate the environment in the Bay Area, Polvi said it's worth trying to get things started in Portland.

"I think it really could work," he said. "There's a decent tech scene there, for sure."